The Icelandic government encourages foreign investment in most sectors. The majority of investment occurs in energy-intensive industries, such as aluminum smelting, that take advantage of the country's abundant renewable energy resources. As part of its investment promotion strategy, the government operates the "Invest in Iceland Agency," which facilitates foreign investment and provides information to potential investors.

As Iceland attempts to rebound from the 2008 economic crisis, the government is reevaluating the role of foreign direct investment (FDI). There is considerable interest in further diversification from the fishing and aluminum industries. Electricity is viewed less as a commodity than previously, as politicians now consider the effects that specific energy intensive projects would have on the economy as a whole, such as in terms of job creation and environmental impact. There is also debate regarding the appropriate types and level of FDI in Iceland. The government has stated its desire to attract FDI in order to create jobs and rebuild the economy, and is in the process of drafting policies to facilitate such investment.

Icelandic laws regulating and protecting foreign investments are consistent with OECD and European Union (EU) standards. As Iceland is a member of the European Economic Area (EEA), most EU commercial legislation and directives are in effect in Iceland. The major law governing foreign investment is the 1996 Act on Investment by Non-residents in Business Enterprises, which grants national treatment to non-residents of the EEA (including U.S. citizens). The law dictates that foreign ownership of businesses is generally unrestricted, but with limitations in fishing, energy and aviation sectors. Only entities that are at least 75 percent owned by Icelanders can hold fishing rights. Non-EEA residents cannot hold hydro and geothermal power harnessing rights; cannot manufacture or distribute energy; and cannot own more than 49 percent of aviation companies. However, such restrictions can, in some cases, be avoided by establishing a holding company somewhere in the EEA. Icelandic law also restricts the ability of non EEA-citizens to own land, but this may be waived by the Ministry of Justice and Human Rights Affairs. The managers and the majority of the board of directors in an Icelandic enterprise must be domiciled in Iceland or another EEA member state, though exemptions from this provision can be granted.

Icelandic courts uphold the sanctity of contracts as a matter of course. Depending on the turnover of the companies in question, the Icelandic Competition Authority shall be notified of mergers and acquisitions. The Authority may annul mergers or set conditions with the objective of preventing harmful oligopolies and the restriction of competition.

There is no automatic screening of foreign investors, although bidders in privatization sales may have to go through a pre-qualification process. Potential U.S. bidders in privatization auctions need to follow the process closely, since the procedures are often ad hoc and deadlines can be short.

The U.S. does not have a bilateral investment treaty (BIT) with Iceland. A Trade and Investment Framework Agreement (TIFA) was signed on January 15, 2009.

The Icelandic economy has yet to recover from the 2008 economic crisis, when bank liabilities amounted to about 10 times the country's GDP. The government is in the process of restructuring the banking system and the former creditors of the banks assumed part ownership in the new banks in late 2009. After the banking sector collapse, inflation soared and peaked at over 18 percent, but by November 2009 annual inflation had decreased to 8.6 percent and is expected to decrease further. The Icelandic Krona (ISK), which depreciated 100 percent against the dollar during the economic crisis, has been relatively stable in 2009. Capital controls remain in effect for all but new investments, though it is anticipated that the Central Bank will continue to gradually lift the restrictions.

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Year

Rank

Score

TI Corruption Index

2009

8-10

8.7

Heritage Economic Freedom

2009

14

75.9

World Bank Doing Business

2010

14

N/A

Conversion and Transfer Policies

Although the Act on Investment by Non-residents in Business Enterprises allows for non-residents to convert into any currency any dividends received or other profits and proceeds from sales of investments, temporary capital controls are now in place to strengthen and stabilize the exchange rate of the ISK. Due to a great inflow of foreign capital to Iceland in the years preceding the economic crisis, a great deal of ISK-denominated assets, such as government bonds, were held by non-residents at the time of the banking collapse. To prevent the massive capital outflow that would have been caused by the selling of these assets, the Central Bank of Iceland imposed capital controls in October 2009. Transactions involving imports and exports of goods and services, travel, interest payments, contractual installment payments and salaries are still permitted. The Central Bank published its Capital Controls Liberalization Strategy in August 2009, stating that the controls will be lifted in stages. The first step, permitting the inflow of foreign currency for new investments and the outflow of capital derived from such investments, was implemented in November 2009. For the outflow of this foreign currency to be allowed, the new investments must be registered with the Central Bank.

Expropriation and Compensations

Cases of expropriation are fairly rare and in most cases involve real estate and land being expropriated because of water and power facilitation, road construction, city planning or things of a similar nature. As far as the U.S. Embassy is aware, the Icelandic government has never expropriated a foreign investment.

Some actions of the Icelandic government before and during the financial crisis in October 2008, such as the takeover of the three major banks with significant foreign investment interests when they were running out of liquidity, have been described by private investors as an expropriation of sorts. Agreements were reached with the creditors of the banks on compensation for assets from the old banks that was transferred to the new banks which were established after the crash.

The Constitution of Iceland proclaims that no one may be obliged to surrender his property unless required by public interests and that such a measure shall be provided for by law and full compensation be paid. A special committee is appointed every five years to review and proclaim the legality of expropriation cases. If the committee proclaims a case to be legal it will negotiate an amount of compensation with the appropriate parties. If an amount cannot be agreed upon, the committee determines a fair value after hearing the case of all parties.

Dispute Settlement

Iceland has ratified the major international conventions governing arbitration and the settlement of investment disputes. Iceland accepts binding arbitration of investment disputes.

After the Government took over control of the three largest Icelandic commercial banks in October 2008, it separated the bank’s domestic and foreign operations, established new banks to take over the domestic operations, and passed a bill that prioritized claims of depositors. Agreements were reached with the bank creditors by December 2009 regarding compensation for assets from the old banks that were transferred to the new banks. U.S. investors were among the bank creditors.

There are no other recent cases of major investment disputes involving foreign investors in Iceland and the Icelandic system has been considered well-equipped to handle any trade and investment dispute.

The Icelandic civil law system enforces property rights, contractual rights and the means to protect these rights. The Icelandic court system is independent from the parliament and government. Foreign parties must abide by the same rules as Icelandic parties, and they enjoy the same privileges in court; there is no discrimination against foreign parties in the Icelandic court system. When trade or investment disputes are settled, the settlement is usually remitted in the local currency.

Under the Constitution, sentences may be passed by the courts only. The courts are divided into two classes: the lower courts, where most cases are heard, and the Supreme Court, which hears appeals from the lower courts. There are eight lower courts and one Supreme Court, all hearing public and private cases. Iceland has been a member of the International Center for Settlement of Investment Disputes (ICSID) since 1966.

Performance Requirements and Incentives

Broadly speaking, Iceland currently does not offer direct subsidies for business investment. Its primary incentives are in providing for a favorable environment for businesses, including relatively low corporate tax rates and low energy prices. However, due to the State's fiscal gap following the financial crash the government has raised taxes to generate revenue. This includes increasing the corporate tax from 15 to 18 percent and introducing a new energy tax of ISK 0.12 ($0.009) per kWh. Past investment agreements have been made on a case-by-case basis and have included, among other incentives, some tax exemptions. The government is currently considering the creation of standardized investment agreements and incentive packages to encourage FDI. Local communities may offer certain additional incentives.

As a member of the EEA, Iceland has access to various EU funding programs, including the Seventh Framework Program. Icelandic entities, including companies established in Iceland, can obtain funding from the Program for joint R&D ventures with entities from other EEA countries.

Film and TV production in Iceland are subsidized by the Icelandic state in the form of a rebate of a portion of production costs. A branch or a representative office must be established in Iceland for these purposes. There are no requirements as to the production budget, but the film should promote Icelandic culture as well as introduce Iceland's history and natural beauty. The film and TV production cost rebate rate is currently 20 percent for costs incurred over the 2007-2011 period. The program does not provide a rebate for the production of commercials or music videos. More information is available at www.filminiceland.com.

Right to Private Ownership and Establishment

Foreign entities are free to establish and own any type of business enterprise and engage in all forms of legal remunerative activity other than in fishing, energy, and aviation. Companies established in the EEA, however, are not subject to these limitations in the energy and aviation industries. If a foreign citizen from outside the EEA wishes to purchase land or real estate in Iceland, a permit is required from the Ministry of Justice. Icelandic law treats public and private enterprises with equality when it comes to market access and other business operations. Foreign investors are permitted to participate in the privatization of government-owned businesses, subject to restrictions imposed by the government.

A foreign party must obtain an identity number (kennitala) before establishing a bank account.

Protection of Property Rights

Iceland adheres to key international agreements on property rights (e.g., Paris Union Convention for the Protection of Industrial Property). Trademarks, copyrights, trade secrets and industrial designs are all protected under Icelandic law. As with many other issues, Iceland is following the European lead in protection of property rights and adheres to the European Patent Convention of 1973. In 2005, Iceland signed the Patent Cooperation Treaty (PCT).

Iceland is a member of the EEA and therefore accepts jurisdiction of the EEA Court. Property rights are recognized and protected in the Constitution of Iceland. Secured interests in property are bound by law and enforced as such and there is a very reliable system which records such security interests.

The Icelandic Patent Office -- a governmental agency under supervision of the Ministry of Industry and Commerce -- handles all patent disputes in Iceland. The legal framework concerning intellectual property rights (IPR) in Iceland is in all respects equivalent to that of other industrialized countries in Europe. Iceland is a World Trade Organization (WTO) member, and Icelandic legislation complies with WTO TRIPS requirements.

As an EFTA state and member of the EEA, Iceland has implemented all relevant EU regulations and directives in the field of IPR. Furthermore, Iceland is bound by bilateral EFTA free-trade agreements which include provisions on IPR.

Iceland is a member of the European Patent Organization. Iceland is a member of WIPO and a party to most WIPO-administered agreements.

Transparency of Regulatory System

Icelandic laws regulating business practices are consistent with those of most OECD member states, and are increasingly based on European Union directives as a result of Iceland's EEA membership. Much of Iceland's financial regulatory system was put in place only in the 1990s, thus transparency is occasionally a concern (i.e. in public procurement, and in privatization sales where the process is established by the government on an ad hoc basis). In response to the financial crisis of 2008, the government is working to increase its regulatory role in the financial sector.

The Competition Authority is responsible for the enforcement of anti-monopoly regulations and the promotion of effective competition in business activities. This includes eliminating unreasonable barriers and restrictions on freedom in business operations, preventing harmful oligopoly and restriction of competition and facilitating the access of new competitors to the market.

The Consumer Agency holds primary responsibility for market surveillance of business operators, transparency of the markets with respect to safety and consumers' legal rights, and enforcement of legislation concerning protection of consumers' health, legal and economical rights.

The system as a whole is transparent, though bureaucratic delays can occur. All proposed laws and regulations are published in draft forms for the public record and are open for comment.

The Icelandic parliament (Althingi) consists of a single chamber of 63 members and a simple majority is required for ordinary bills to become law. All bills that are introduced in the parliament are in draft form. Drafts are open to the public and are published on the parliament's web page. Interested parties can comment on proposed law and regulations.

Efficient Capital Markets and Portfolio Investment

All companies have access to regular commercial banking services in Iceland, even if it is likely that financing for large-scale investment projects will largely need to come from abroad. The ISK was relatively stable in 2009 under the implementation of capital controls. There is ample demand for foreign currency, but selling large amounts of ISK in a single transaction might be difficult. The Central Bank has often involved itself in the market since the collapse, buying ISK, and those who have been allowed to sell ISK under the capital controls have been able to do so.

Prior to the collapse of the banking sector in October 2008, the assets of Icelandic banks, now considered to have been overvalued, were estimated at about ten times Iceland's GDP. At that time, the government took over the three largest commercial banks and subsequently transferred domestic assets to new banks, which were established for that purpose. Agreements were reached with the receivership committees of the old banks on behalf of the creditors by December 2009 to provide compensation for those assets. The creditors of the bankrupt banks became part owners in the new banks, with creditors of two banks obtaining a majority stake in Íslandsbanki (formerly Glitnir) and Arion (formerly Kaupthing). The combined assets of these new banks amount to roughly 1.5 times Iceland’s GDP in 2008. There are also a number of other smaller financial institutions active in Iceland, notably MP bank, which acquired a commercial banking license in 2008 and has assets valued at 53 billion ISK ($424 million).

The OMX Nordic Exchange operates the market for securities in Iceland and trades various products. Activity has been limited since the crash, but the infrastructure is in place. The Central Bank frequently issues and auctions ISK-denominated government bonds and welcomes foreign participation.

Competition from State Owned Enterprises

Private enterprises are generally allowed to compete with public enterprises under the same terms and conditions in all sectors except energy manufacturing and distribution. SOEs are most active in the banking, energy, health and alcohol sectors. In some cases, politicians are on the boards of SOEs.

In the midst of the banking crisis, the state, through the Financial Supervisory Authority (FME), took over Iceland's three largest commercial banks in October 2008 and has subsequently taken over several savings banks to allow for uninterrupted banking services in the country. As of December 2009, creditors of two of the three largest banks acquired a majority of shares in the newly established commercial banks. The state has a considerable stake in many companies through its shares in the banks; however, it is the policy of the government not to interfere with internal or day-to-day decisions of these companies.

In 2009, the state established the Bank Shares Management Company to manage the state-owned shares in financial companies. The Minister of Finance appoints the three board members, who appoint a committee that determines who will represent the state on the boards of financial companies.

While most energy producers are either owned by the state or municipalities, there is free competition in the energy market. In 2008 one of the major energy companies was split into two companies: one that produces energy and another that distributes it. Subsequently, a foreign company bought more than 40 percent of the energy producing company through its EEA subsidiary.

The universal healthcare system is mainly state operated, though the Embassy is aware of plans to build private health tourism facilities in Iceland. Few legal restrictions exist; however, private clinics need an agreement with the Icelandic state, a foreign state or an insurance company regarding payment for services.

The State Alcohol and Tobacco Company of Iceland (ÁTVR), has exclusive rights for the retail sale of all alcoholic beverages. Importers and wholesale companies are privately run.

Corporate Social Responsibilities

In general, there is an awareness of corporate social responsibility among both producers and consumers.

Political Violence

Iceland experienced political protests stemming from the October 2008 financial crisis. Public protests spurred the government to dissolve and a new coalition to form prior to early elections in spring 2009. Although the occasional protests are still held, they are much less intense then in late 2008 and early 2009. There have been limited cases of politically motivated vandalism of foreign holdings in recent years, directed primarily at the aluminum industry.

Corruption

Isolated cases of corruption occur but are not an obstacle to foreign investment. In 2009 Iceland tied for 8-10 place out of 180 countries in Transparency International’s Corruption Perceptions Index Ranking. It was ranked as high as number one in 2006.

Bilateral Investment Agreements

The U.S. has neither a bilateral investment treaty (BIT) nor a Free Trade Agreement with Iceland. There is no Social Security Totalization Agreement in place between the U.S. and Iceland, meaning that some dual citizens must pay into both social security programs. There is a U.S.-Iceland bilateral taxation treaty and a Trade and Investment Cooperation Forum Agreement (TIFA).

OPIC and Other Investment Insurance Programs

Political risk insurance and project financing have traditionally been available on the local and international markets. As a result of the financial crisis in fall 2008 and the current restructuring of the banking sector, however, project financing may be temporarily limited. Iceland is a member of the Multilateral Investment Guarantee Agency.

Labor

The labor force in Iceland consists of just over 180,000 people aged 16 and older and is highly skilled. Until the economic crisis in October 2008, demand for labor exceeded supply. Foreign labor moved to Iceland to fill the majority of unskilled service jobs and semi-skilled construction jobs, as the EEA-agreement allows for the free movement of labor within the area. Layoffs followed in the wake of the economic crisis, particularly in the financial and construction sectors. Unemployment rose quickly and peaked at 9.1 percent in April 2009. As of November 2009, unemployment was 8.0 percent.

The labor market is highly unionized with 80-85 percent of employees belonging to unions. Icelandic labor unions are decentralized and non-political. Contractual wage agreements cover general terms of employment, including a basic minimum wage, but specific terms are usually negotiated on a more job-specific basis. Collective bargaining power, in both the public and the private sectors, rests with individual labor unions. The government has imposed mandatory mediation when strikes have threatened key sectors in the economy such as the fishing industry.

The basic legal work week is 40 hours over 5 days, but some professions have 37.5 – 39.5 hours per week, mainly office clerks and sales assistants. Most employees are paid for overtime, or alternatively allowed time off in lieu of paid compensation. Typical shift-work rates are an extra 33% on top of the daytime rate, and an extra 45% for weekend or public holiday work. A continuous rest period of 11 hours is typically guaranteed during each 24-hour period. In certain circumstances the rest period may be shortened to 8 hours.

Iceland has ratified approximately 20 ILO conventions, including those that protect basic workers' rights.

Foreign Direct Investment Statistics

The following tables reflect data available as of December 2009. Information in this chapter was obtained from the Central Bank of Iceland. The Central Bank of Iceland does not provide information on specific investments, but the majority of U.S. investment in Iceland is in the aluminum sector. A large part of the FDI stocks from Belgium/Luxembourg and the Netherlands may be held by Icelanders residing there.

Total FDI stocks in Iceland in 2008 amounted to 75.2 percent of Iceland’s GDP. The total 2008 FDI flows to Iceland amount to 1.6 of GDP, but FDI flows in 2008 amounted to less than one-tenth of FDI flows in 2007.

USD/ISK end of year mid-exchange rate:

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Year

2005

2006

2007

2008

Rate

62.86

63.13

62.00

120.87

FDI stocks in Iceland by country (in millions of USD):

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Year

2005

2006

2007

2008

Total FDI

4,698

8,703

16,360

9,196

US

465

600

885

880

Belgium/Lux

1,124

2,807

8,827

7,159

Netherlands

1,863

3,509

5,205

441

Norway

95

127

189

201

Switzerland

148

177

156

191

Sweden

62

76

94

174

Denmark

85

110

180

135

UK

120

222

424

-6

FDI stocks in Iceland by industry (in millions of USD):

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Year

2005

2006

2007

2008

Total FDI

4,698

8,703

16,360

9,196

Holding companies

373

24

5,689

5,281

Metal and mech. production

1,203

2,392

3,157

2,697

Financial activities

1,870

4,071

6,064

586

Trade and repairs

50

247

247

185

Telecommunication

233

209

235

172

Food production

71

224

235

88

Transport and storage

211

444

500

-30

FDI flows to Iceland by country (in millions of USD):

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Year

2005

2006

2007

2008

Total FDI

3,077

4,479

7,079

191

US

79

-91

318

26

Belgium/Lux

378

1,864

4,961

-210

Netherlands

2,323

2,040

3,457

-132

Norway

-1

6

-6

47

Switzerland

6

15

8

33

Sweden

9

4

3

377

Denmark

12

11

49

-19

UK

191

222

104

-141

FDI flows in Iceland by industry (in millions of USD):

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Year

2005

2006

2007

2008

Total FDI

3,077

4,479

7,079

191

Holding companies

64

155

4,613

432

Metal and mech. production

648

1,002

496

86

Financial activities

2,337

2,839

3,018

89

Trade and repairs

1

216

7

-36

Telecommunication

28

-25

22

-15

Food production

17

263

158

-77

Transport and storage

20

52

487

-265

Icelandic FDI stocks abroad by country (in millions of ISK):

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Year

2005

2006

2007

2008

Total FDI

635,955

987,450

1,526,379

1,063,299

US

96,057

84,538

189,425

190,602

Netherlands

152,947

201,466

496,550

290,514

UK

167,140

229,743

251,793

267,533

Denmark

80,647

158,504

184,425

260,190

Sweden

14,737

31,197

98,310

61,717

Norway

29,123

67,652

111,532

59,311

Canada

4,187

2,468

28,797

42,499

Belgium/Lux

39,521

110,524

-130,223

-311,281

Icelandic FDI stocks abroad by country (in millions of USD):

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Year

2005

2006

2007

2008

Total FDI

10,117

15,642

24,619

8,797

US

1,528

1,339

3,055

1,577

Netherlands

2,433

3,191

8,009

2,404

UK

2,659

3,639

4,061

2,214

Denmark

1,283

2,511

2,975

2,153

Sweden

234

494

1,586

511

Norway

463

1,072

1,799

491

Canada

67

39

464

352

Belgium/Lux

629

1,751

-2,100

-2,575

Icelandic FDI stocks abroad by industry (in millions of ISK):

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Year

2005

2006

2007

2008

Total FDI

635,955

987,450

1,526,379

1,063,299

Financial activities

144,736

243,983

593,988

359,202

Petro, rubber and chemical

102,273

153,884

249,609

330,213

Trade and repair

62,581

83,814

103,635

173,721

Food production

46,941

67,265

71,878

88,995

Transportation and storage

11,409

18,256

56,908

74,112

Prosthetic aids

3,559

3,871

22,629

41,077

Real estate companies

-

5,471

34,785

15,901

Scientific activities

34,867

41,080

89,164

15,632

Holding companies

221,951

356,214

287,345

-92,719

Icelandic FDI stocks abroad by industry (in millions of USD):

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Year

2005

2006

2007

2008

Total FDI

10,117

15,642

24,619

8,797

Financial activities

2,303

3,865

9,580

2,972

Petro, rubber and chemical

1,627

2,438

4,026

2,732

Trade and repair

996

1,321

1,672

1,437

Food production

747

1,065

1,159

736

Transportation and storage

182

289

918

613

Prosthetic aids

57

61

365

340

Real estate companies

-

86

561

132

Scientific activities

555

651

1,431

129

Holding companies

3,531

5,643

4,365

-767

Icelandic FDI flows to abroad by country (in millions of ISK):

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Year

2005

2006

2007

2008

Total FDI

445,433

372,935

663,934

-716,513

US

85,319

26,624

112,643

-88,994

Netherlands

131,022

47,619

70,059

-251,383

UK

118,834

30,910

62,732

-24,186

Denmark

19,137

59,632

56,597

-39,315

Sweden

8,086

18,057

55,398

-89,962

Norway

36,930

41,517

61,290

-26,897

Canada

87

-990

95,371

-16,399

Belgium/Lux

22,106

77,226

-170,629

27,878

Icelandic FDI flows to abroad by country (in millions of USD):

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Year

2005

2006

2007

2008

Total FDI

7,086

5,907

10,709

-5,928

US

1,357

422

1,817

-736

Netherlands

2,084

754

1,130

-2,080

UK

1,891

490

1,012

-200

Denmark

304

945

913

-327

Sweden

129

286

894

-744

Norway

588

658

989

-223

Canada

1

-16

1,531

-136

Belgium/Lux

352

1,223

-2,752

231

Icelandic FDI flows to abroad by industry (in millions of ISK):

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Year

2005

2006

2007

2008

Total FDI

445,433

372,935

663,934

-716,513

Financial activities

94,196

89,916

488,801

-293,387

Petro, rubber and chemical

96,020

84,801

36,961

29,452

Trade and repair

22,454

32,161

3,609

2,317

Food production

10,390

21,085

7,267

-35,990

Transportation and storage

5,257

5,597

123,436

-38,370

Prosthetic aids

333

-148

112

-3,574

Real estate companies

-

6,765

41,243

-38,410

Scientific activities

41,484

2,740

79,111

-972

Holding companies

172,692

125,920

-121,763

-295,150

Icelandic FDI flows to abroad by industry (in millions of USD):

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